By Hong Zhao

Chinese and Japanese Investment in ASEAN: From Competition to Cooperation?

Southeast
Asian countries still face major challenges in regional market integration and
connectivity development. ASEAN has come up with several initiatives in an
attempt to close its development gaps. ASEAN’s plans to strengthen connectivity
through the development of a series of rail, road, and water links not only
offer the possibility of investment contracts, but also the opportunity for the
regional powers to shape Southeast Asian infrastructure in their favor. This
has prompted and heightened competition between the two Asian giants of China
and Japan, particularly in the areas of infrastructure financing and high-speed
rail (HSR) construction.

Japan
began its large-scale investment in Southeast Asia since the late 1970s and had
formulated and invested its vision for infrastructure connectivity across
Southeast Asia in the 1990s. The basic idea of Japan’s development of interconnectivity
in Southeast Asia is to establish cross-regional and inter-regional
interconnectivity and, especially with large urban agglomerations as nodes, to
build economic corridors across different developing countries in the region,
so as to promote ASEAN countries’ industrialization and regional integration.

Japan
regarded ASEAN as “a market where Japan can never lose and be behind.” After
Japan was outbid for the Indonesian HSR project between Jakarta and Bandung in
September 2015, the Japanese government was prompted to adjust its loan
policies and promised to contribute “high quality” infrastructure development
in the future. In February 2018, Prime Minister Shinzo Abe and his cabinet
outlined Japan’s
new aid strategy, pledging to employ Japan’s aid power for the
realization of the “Free and Open Indo-Pacific Strategy” which was announced by
Abe in August 2016 and which aimed to enhance connectivity through “high-quality”
infrastructure and the implementation of maritime law enforcement.

China
began to cultivate its economic ties with Southeast Asia much later than Japan.
Its commitments to infrastructure development in Southeast Asia were seen in
the early 2000s when Yunnan Province and Guangxi Zhuang Autonomous Region
prioritized inter-regional physical transport connectivity with ASEAN countries
and initiated the Gateway Strategy and the Pan-Beibu Gulf Economic Zone
respectively. They aimed to strengthen their land connectivity with Southeast
Asia through expressways and railways, as well as building bilateral maritime
and air connectivity through port, harbor-related, and airport infrastructure
cooperation.

China’s
initiatives for building infrastructure connectivity in Southeast Asia gained
momentum in 2013 when President Xi Jinping proposed the Belt and Road
Initiative (BRI). This initiative has the strategic objective of advancing
practical economic cooperation on infrastructure development and strengthening
linkages with neighboring states by relying on the distinctive values and ideas
of the ancient Silk Road.

Beijing’s
long-term goals for infrastructure building in Southeast Asia within the framework
of the broader BRI include the ambitious plan to build a Pan-Asia Railway
Network that will see three 4,500-5,500 km railway lines linking China and
Southeast Asia. Central, eastern and western routes of this planned railway
network will run from Kunming through Laos, Thailand, Myanmar, Malaysia and
Singapore.

The China-ASEAN
transport cooperation plan paved the way for the International Transport
Corridor between China and Southeast Asian countries. More importantly, the
Sino-Laos and Sino-Thailand railways will form a vast railway network
connecting local areas, and that is a salient feature which neither Japan nor
other countries can match. While Chinese investment in the ten ASEAN countries
is well behind Japan and even the US, it will only increase further as the
implementation of China’s BRI goes on and policy coordination is strengthened
between China and ASEAN.

In
2015, Japanese and Chinese FDI inflows to ASEAN reached USD 17.3 billion and
USD 8.1 billion respectively, accounting for 21.3 percent of the total FDI
inflows.

If we
look at the respective Chinese and Japanese plans to develop railway networks
in Southeast Asia, we find the two countries have different ideas and strategic
considerations. Japan mainly focuses on building East-West lines, intending to
synergize with several Japan-involved East-West Economic Corridors that would
connect Myanmar, Thailand, Laos and Vietnam, and aiming to help Japanese
companies expand business and optimize the production networks within and
outside the ASEAN region through infrastructure connectivity.

In
contrast, Beijing’s long-term goals for infrastructure development in Southeast
Asia within the framework of the broader BRI is to build a North-South Pan-Asia
Railway Network, intending to synergize with the proposed Kuala
Lumpur-Singapore HSR and improve its access to Southeast Asia and beyond. That
said, Sino-Japanese infrastructure investment activities in Southeast Asia are
not largely influenced by their geo-political rivalry. Their respective investment
activities rest on solid market expansion considerations.

For
Japan, the government explicitly located the export of infrastructure systems
(including HSRs) as a key to revitalize its long-stagnated economy and foster
new sources of economic growth. The infrastructure business was regarded as a
business that extended from manufacturing to services and was a main item for
obtaining the global market. The Abe government thus was determined to
strengthen sales of Japanese infrastructure products through private
investment.

For
China, its infrastructure projects in the region carry some political
considerations (mostly through the BRI and the AIIB), but they rest more on
economic interests. One of the major objectives of China’s BRI is to reduce
disparities in China by stimulating growth in the country’s underdeveloped
hinterland. It seeks to accelerate the development of the western region
through accommodating and synergizing with the development strategies of
neighboring countries, with approaches including creating new corridors for
international economic cooperation, putting into place a smooth and efficient
regional thoroughfare. In this sense, Japan and China have common goals and
economic interests in Southeast Asia, and such competition is generally good
for the overall development in Southeast Asia.

For
ASEAN countries, both China and Japan are important sources of investment,
important markets and key trade partners. In 2015, Japanese and Chinese FDI
inflows to ASEAN reached USD 17.3 billion and USD 8.1 billion respectively,
accounting for 21.3 percent of the total FDI inflows (USD 119.9 billion),
according to the 2016 ASEAN foreign direct investment statistics database. Both
China and Japan have been able to mobilize their financial and construction
capability to finance infrastructure projects in Southeast Asia. So, in order
to avoid overdue competition between the two big powers, both China and Japan
need to consider possible harmonization with each other’s policies and find a proper
approach.

Regional
connectivity is the long-term goal of the ASEAN Community, and ASEAN has its
own agenda, including ASEAN Integration Work Plan and the Master Plan on ASEAN
Connectivity 2025. It is possible that other powers’ investments may not be
consistent with ASEAN’s agenda and initial intentions.

For
example, as China’s investment in some individual countries increases, there
are growing
concerns that “the new infrastructural connections — which would tie
Southeast Asia nations individually to China, rather than connecting China with
ASEAN as a whole—would pose a threat to ASEAN connectivity, a key principle in
the strength of the organization.” Furthermore, as the Japanese and Chinese HSR
systems use different types of construction, it is possible that railway
networks could be incompatible if various countries across the region choose to
adopt different systems and technologies.

Therefore,
an effective mechanism for coordination and dialogue on the regional
connectivity between ASEAN, China and Japan is needed. More importantly, such
multilateral collaboration would foster trust between China and Japan and
enhance the effectiveness of their infrastructure development efforts from a broader regional perspective than through
the narrow lens of national interests.